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Death of Former CEO Abates Certain Convictions and Restitution Amounts

(Parker Tax Publishing October 2017)

The Second Circuit held that the death of a taxpayer, who was appealing a jury conviction relating to his looting of the company which he founded, abated all of his convictions at the time of his death along with any corresponding restitution. However, the court said, his death did not abate the other convictions or restitution amounts that related to guilty pleas he had entered on tax offenses. U.S. v. Brooks, 2017 PTC 427 (2d Cir. 2017).

David Brooks was the founder, Chair of the Board of Directors, and CEO of DHB Industries, Inc., a publicly traded company that manufactured and sold body armor to law enforcement agencies and the U.S. military. In October 2007, Brooks was indicted on charges of participating in several schemes to defraud shareholders, including overvaluing the inventory of DHB and its subsidiaries, reclassifying costs to inflate DHB's profitability, falsely adding non-existent inventory to the company's books, and obstructing a Securities and Exchange Commission (SEC) investigation.

In addition to the allegations concerning manipulation of the DHB books and false SEC disclosures, the government alleged that Brooks also defrauded DHB shareholders by diverting DHB assets for the benefit of Brooks, the Brooks family, and other DHB executives. According to the government, Brooks used the money for things like hiring Tom Petty, 50 Cent, and Aerosmith as entertainment for a $10 million Bat Mitzvah for his daughter, buying a $100,000 belt buckle with diamonds, rubies and sapphires arrayed in the shape of an American flag, buying a second $100,000 belt buckle, paying expenses for his personal horse-racing business, and giving company credit cards and checks to his family to cover their personal expenses including clothing, home renovations, plastic surgery, vacations and airfare, automobiles, entertainment, and gifts. Brooks also sold substantial shares of DHB stock while the stock price was artificially inflated, making hundreds of millions of dollars in profit. Finally, the government also alleged that Brooks paid himself millions of dollars through DHB that was not reported as income to the IRS.

Before the trial, a district court entered a pre-trial restraining order on 14 bank and investment accounts held by Brooks and his family that the court found would be subject to forfeiture in the event of a conviction.

The government requested that Brooks be detained or that his release be subject to a substantial bond and the full disclosure of his financial holdings, and subject to Brooks returning all of his assets from overseas back to the United States. The district court concluded that Brooks was a flight risk on the basis of his considerable wealth and the potential for access to foreign accounts if he fled the country. The district court was also concerned that undisclosed and unmonitored accounts could be used to facilitate witness tampering. In January 2008, the district court granted Brooks' request for pre-trial release on certain conditions, including home detention monitored by a private security firm, monitored conversations, independent auditing of bank accounts and assets, and a prohibition on liquid assets being held overseas without the approval of the U.S. Attorney's office. Brooks agreed to the conditions and he and his family sureties also provided $48 million in cash as security for a $400 million bond the court ordered. The court's order provided that if Brooks concealed assets, that conduct would be grounds for revocation of his bail and the forfeiture of the $48 million cash security.

In January 2010, shortly before Brooks' trial, the government moved to revoke Brooks' bail on the basis of an FBI affidavit that showed that Brooks and his family had hidden substantial assets in violation of the court's order. The government sought forfeiture of the entire $400 million bond. The district court revoked Brooks' bail and ordered his detention, but ordered forfeiture of only the cash security of $48 million.

According to the FBI affidavit, before the entry of the bail bond order, a confidential source had met with Brooks and Brooks' brother as well as other family members to create various corporations and bank accounts around the world to conceal millions of dollars in assets. The source set up a scheme called "Czerny Kot" (Polish for "black cat") using the passports of Brooks' brother and Brooks' children to open nominee accounts. Testimony of Brooks' personal pilot showed that Brooks, Brooks' brother, and other family members (including his children) flew to Switzerland in a private plane to deposit assets in Swiss safe deposit boxes.

In September 2010, Brooks was convicted after a jury trial on multiple charges relating to securities fraud, mail and wire fraud, and obstruction of justice. He was also convicted of related tax offenses based on guilty pleas he entered after the jury's verdict. Following his convictions, Brooks was sentenced to 204 months' imprisonment, ordered to pay restitution and a fine, and ordered to forfeit assets.

Brooks appealed his convictions based on the jury verdict but not the tax counts. After the verdict, Brooks' ex-wife and their children moved to set aside the forfeited bail bond security. The district court denied the motion and the family members appealed. Brooks died while he was in prison and while those appeals were pending.

As a result of Brooks' death, his estate moved for abatement of his convictions, the order of forfeiture, the orders of restitution, the fine, and the special assessment that accompanied the judgment of conviction. Brooks' estate, as well as his ex-wife and their children, also moved for abatement of the $48 million bail bond forfeiture. The government did not oppose the abatement of Brooks' convictions on the non-tax counts and accompanying order of forfeiture, fine, and special assessment, but opposed the abatement of the restitution obligations and the forfeiture of his bail bond.

The Second Circuit concluded that the death of Brooks abated all of his convictions that were pending appeal at the time of his death and any corresponding restitution. However, the court said, his death did not abate the other convictions or restitution nor the order of bail bond forfeiture for the cash security imposed as a result of his violations of the terms of his release on bond. The court noted that, because bail bonds are an independent and collateral matter, the forfeiture of a bail bond does not abate with the death of a criminal defendant.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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